Operating Agreement Definition

Learn more about what an operating agreement is in business.

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operating agreement definition

One of the first documents you may have heard about when researching limited liability company (LLC) formation is an operating agreement. If you’re thinking about starting your own LLC, you may be wondering, what is an operating agreement? 

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Operating Agreement Definition

The definition of an operating agreement is a document that clearly outlines an LLC’s rules and structure. It’s one of the most important documents for your LLC. The operating agreement can detail:

Every business’s operating agreement will be different and can range in length depending on the detail it provides. The main purpose is to have a set of rules to point to as a guideline for the LLC’s operation. Whether your LLC’s operating agreement is one page or twenty, there are clear benefits to having an operating agreement. 

Are There Any Operating Agreement Benefits?

There are several different operating agreement benefits that come with having an operating agreement. Most of those benefits become apparent in worse-case scenarios. In the event that the legal entity dissolves, your operating agreement can help you determine how to split its assets. Another operating agreement advantage is that it can be written to establish rights and responsibilities of each member or manager of the LLC. In the event of a dispute, an operating agreement can help determine the appropriate resolution. As your LLC scales and grows, an operating agreement will articulate the business rules of the LLC. 

Operating Agreements Considerations 

 LLC terminology is quite different from terminology used in other businesses. An LLC can be “member managed” or manager managed.” A member-managed LLC is operated by all members, or owners.  A manager-managed LLC is operated by designated managers who can either be LLC members or hired employees. 

An operating agreement serves an important role in defining and limiting the authority of an LLC’s managers. It can also outline the compensation managers receive for their services.

Are Operating Agreements Required to Form an LLC?

Contrary to what you may think, an operating agreement isn’t required to form an LLC. Operating agreements are optional in most states. If you opt out of having an operating agreement for your business, then your LLC will be governed by the law that your state has adopted regarding things like LLC dissolution and equity splits. Depending on your state’s laws, relying on the default LLC laws may be a disadvantage for your LLC.

Operating Agreement Template Service

Not sure what to include in your operating agreement? We explain what to include and how to create an operating agreement.

Whether you have experience drafting an operating agreement or not you can benefit from using our Operating Agreement Template to get started. If you need examples of an operating agreement or a good place to start with your operating agreement, we provide the resources that you need. We are committed to assisting you with building a solid structure for your LLC.

Summary

An operating agreement is a document that details the specifics of your business including the names of members and managers, voting rights, ownership percentages, and the events causing dissolution. Although most states don’t require you to have an operating agreement for your LLC, it ‘s highly recommended and has proven to be a benefit for LLC members and their businesses.  

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It can be overwhelming to keep track of all the required documents for LLC formation. If you’re interested in forming an LLC, we’re here to assist you in that process. Our Operating Agreement Template and other LLC Formation Services will get you on your way to creating an effective LLC structure. Get started on creating your operating agreement with one of our plans today. 

Disclaimer – The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.

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